KKR shows benefit of the long game

Kohlberg Kravis Roberts wasn't the first private equity investment fund operator to set up in Asia and Australia but it is leading the pack now after raising a stonking $US6 billion for its latest Asia-Pacific investment fund. It's the largest pan-Asian private equity raising so far and it says something about this region's prospects that contradicts short-term angst about growth slowdowns.

The PE industry has been changed by the global crisis. Institutional investors are more choosy about alternative asset classes. Debt that leverages private equity to create acquisition kitties is more difficult to raise. PE players need to be prepared to hold assets for longer before they exit: and the exits have become more complicated, because the pre-crisis default option of a sharemarket listing has been replaced by partial sell-downs and trade sales.

The successful $US6 billion raising shows, however, that KKR is reaping the rewards of outperformance with its first pan-Asian fund, which raised $US4 billion in 2007. It also shows that the Asia-Pacific region, including Australia, is still hot after doubling its share of global private equity funding to about 15 per cent in the past decade.

KKR sold an investment in the Japanese recruitment firm Intelligence Holdings in April for an estimated five times more than it invested, and was reported to have doubled its money on the sale of a Singapore computer parts-maker, Unisteel, last year. It is also well ahead on a 2009 takeover of South Korea's Oriental Brewery group for $US1.8 billion and has just sold a stake in Chinese dairy company China Modern Dairy at an estimated three times its stake money.

In the private equity game it isn't over until it's over. The final reckoning comes after the fund has sold everything it owns. In regulatory filings KKR has estimated that its first Asia fund is generating an internal rate of return of 14 per cent. It is beating Asian funds run by private equity groups that established themselves in Asia before KKR, including TPG and Carlyle, and the outperformance is generating repeat business: 61 per cent, or $US3.5 billion, of the new equity that has been raised for the new fund has come from participants in the first fund.

KKR has invested more than $US5.5 billion of equity in 30 companies in the Asia-Pacific region since 2005, using a "global-local" approach that sees it centralise its funding and shop for assets through locally staffed offices in Sydney, Beijing, Hong Kong, Mumbai, Seoul, Singapore and Tokyo.

Now, with $US6 billion of new equity funding in its pocket, it will be on the hunt again across the region, including in Australia.

The $265 million sale of a 12 per cent residual stake in Seven West Media in May wrapped up an adventure that began in 2006 when KKR and Kerry Stokes' Seven Network jointly acquired the Seven television network - but KKR still has about 15 per cent of its deployed equity invested here, primarily in resources sector engineer Bis Industries and the GenesisCare healthcare group.

KKR's ability to persuade institutions and other wholesale investors to stump up another $US6 billion that will be locked up for as long as a decade as it buys into companies, renovates them and then searches for profitable exits says something fundamentally positive about the part of the world we are in.

There are short to medium-term questions about where the world is headed.

On Wednesday, the angst was pinned to three things.

First, the pending release of Federal Reserve minutes on Wednesday (US time) that might contain clues about how quickly the quantitative easing crutch will be kicked away from the US economy.

Second, global growth forecasting downgrades from the International Monetary Fund, including cuts in China's expected growth from 8.1 per cent to 7.8 per cent this year and from 8.3 per cent to 7.7 per cent next year. And finally, news halfway through trading on Wednesday that China's exports fell by 3.1 per cent in June, instead of rising by 4 per cent as the markets had expected.

China's export numbers point to a soft second-quarter growth number when it is announced next Monday, and traders scythed away two-thirds of the S&P/ASX 200 Index's gain on Wednesday afternoon after hearing the news.

That left the index up only 19.75 points, albeit above 4900 points for the first time since June 4, at 4901.4 points.

China's economy will probably still expand by about 7.5 per cent this year, however; a pace well below the peak average of 12.7 per cent in the three years to 2007 before the global crisis, but still good enough to double China's gross domestic product in a decade, adding more than $US8 trillion of annual output.

Long-term views like that are the kind private equity funds adopt. Their investments are also long-term, and they shape their strategies accordingly. In KKR's case, it has meant, for example, a focus on quality consumer goods plays in Asia that can capitalise on a growing consumer culture as the Asian century develops.

mmaiden@fairfaxmedia.com.au